Traders expect European gas prices to remain elevated for years to come, pushed higher by supply strains, even after Russian president Vladimir Putin allowed flows to resume last week through a critical pipeline.
The price of gas set to be delivered to Europe at this time of year in 2023 and 2024 is near its highest level on record at €134 and €82 per megawatt hour respectively, according to trading in yearly forward contracts used by consumers of the fuel to lock in long-term prices. Before last summer, European gas prices traded consistently below €40 per MWh for more than a decade.
Gas prices doubled in June when Moscow cut flows ahead of scheduled maintenance work on the Nord Stream 1 pipeline into Germany. But despite Russia switching the taps back on this month, fears of more potential disruption have kept futures contracts close to record levels.
Markets are pricing in worries that Putin will continue to peddle the threat of switching off the taps for as long as his invasion of Ukraine drags on. The Russian leader has warned of potential problems with a turbine next week, which could result in lower gas flows through Nord Stream 1.
Helima Croft, an analyst at RBC, said US government officials increasingly believe that over summer “Putin will probably seek to keep Europe in a state of perpetual panic by deploying a rolling cut-off strategy to prevent sufficient storage from being built”.
Gloom around Europe’s energy outlook has been growing since last autumn when the Russian president declined to increase gas flows, and high energy prices are now driving expectations of a recession on the continent.
Vincent Demoury, secretary-general of the International Group of Liquefied Natural Gas Importers, warned that Europe’s energy crisis will last for years and that its luck will eventually run out unless it manages to sign long-term deals for LNG supplies from exporters such as the US or Qatar and reduce its reliance on the expensive spot market where traders can get gas for imminent delivery.
“We might be able to go through the winter of 2022 or 2023 without too much damage — if we are lucky — but the next winter will be probably more difficult and the winter after that even more difficult,” he told reporters earlier this month.
A complete stop to supply through the Nord Stream 1 pipeline would lead to wider energy rationing this winter and further inflationary pressure.
Such a scenario would deepen the blow to eurozone economies this winter, according to Oxford Economics, a consultancy. Germany, which secured more than half of its gas imports from Russia in 2021, would be in for a gross domestic product slump of between 5 and 6 per cent next year, Deutsche Bank analysts estimate.
The EU floated plans last week to reduce gas consumption by 15 per cent over the winter but it has already faced a backlash from member states.
Karolina Siemieniuk, an analyst at consultancy Rystad, said Europe needed to move fast to cut consumption to survive this winter relatively unscathed. Even if it manages to, she said the “spectre of the next winter in 2023-24 is likely to keep prices elevated for months on end”.
But some see a path towards lower prices, despite limited fresh sources of LNG supply before 2026. Jonathan Stern, distinguished research fellow at Oxford Institute for Energy Studies, said that “we should not underestimate the effects of recession” on gas demand, citing the “dramatic” drop during the 2008 financial crisis.